The Simple Path to Wealth

Sell! Sell!! Sell!!! Sell?

Based on some of the recent questions/comments here on the blog, it seems folks are getting ready to.

I routinely get questions like “I have a lump sum to invest, but this market looks to me like it is about to crash. Should I wait?”

Typically, I trot out my standard lecture about how market timing is a fool’s errand, point them to Investing in a Raging Bull and go about my business.

But recently, these concerns have taken a spike up as has the flow of new subscribers here. So, maybe it is time to explore this subject again. If you are already a jlcollinsnhinista, you already know the drill. There’ll be nothing new to see here. Move along.

But if you are new to all this, together we’ll explore this market and what to do about it.

Let’s get started.

Back in October 2007, the market peaked at ~1549 and then began it’s long, ugly slide to its ~735 bottom in February 2009, losing over half its value in what was the worst financial meltdown since the great depression. Of course, no one really knew that was the peak, or the bottom at the time.

Warren Buffett “lost” 25 billion dollars. “Lost” is in quotes because he didn’t panic and sell. So, when the market recovered and marched on up to new heights, as it always does, so did his fortune. So did the fortunes of all who stayed the course.

Since that low in February ’09, the market has had one of the great Bull runs in history. Its rise has been relentless, interrupted only on occasion with modest ~10% “corrections” as Wall Street calls them. These, of course, sent the media into full panic mode:

Since November 2016 the market has accelerated from ~ 2086 to the current peak reached early this March of ~2396, for a remarkable 4 month gain of ~15%. In the media, this has come to be known as “The Trump Rally.”

Now, the market is a huge and complex creature, and I am always very skeptical of pundits who so glibly claim…

In the past few weeks, however, the effort to rewrite healthcare failed and, to paraphrase the President:

“Who knew how complex this stuff is and how difficult to get done”

Since the March 1st high, the market has drifted down about 3% closing April 13th at ~2329. It kinda feels like it is holding its breath.

Add to this the fact that in various fancy versions of P/E (price/earnings) ratios, the “P” is getting larger and larger while the “E” seems stuck. Given they are again reaching historic heights and, after an incredible 8-year Bull run, the market is “due” for a Bear, it is not surprising that some investors, in some quarters, are getting very nervous. The market seems “priced for perfection” and if these good things it is anticipating fail to materialize, things could get ugly.

Surely, we are poised for a plunge and you should sell, sell, sell! Or at least wait to deploy new cash.

But, things are never this simple and the future never that clear. If it were, everyone would already be heading for the exits. Instead, it could be, we are set for another powerful move up.

The Trump administration could regroup and start notching up victories on each of those bullet points above. Or the market, fickle as it always is, could decide those things are not all that necessary after all and some new thing(s) have its heart all aflutter anew.

Could be, rather than the “P” falling, the “E” will start catching up and those P/E ratios will start to drop to more comfortable levels.

Plus, as the saying goes, “the market climbs a wall of worry” and there is certainly a lot of worry out there just now. Markets are far more prone to crashing when everyone is euphoric than when they are nervously looking over their shoulders.

So, what is really going to happen next? Beats the bloody hell out of me. I have no idea. Neither do all those media gurus who claim they do. I’m just willing to admit it and/or am not delusional.

So, what to do?

Well, first, let me reiterate as I have throughout this blog: market corrections (~10%), bears (20%+) and crashes (30% on up) are a normal part of the process. They can’t be predicted or avoided. They are best simply ignored. Warren Buffett:

“The Dow started the last century at 68 and ended at 11,497. How could you lose money during a period like that? A lot of people did because they tried to dance in and out.”

(confession: that quote is drawn from my memory and is likely not exact. I gave up trying to find the exact quote in order to finish this post. I’m sure one – maybe even you – of my astute readers will point us to it in the comments below. Thanks!)

Market timing is a losers game. Even if you guess right and this market does plunge shortly, you still have to predict how far that drop will go and when to get back in. Most often, those that get it right sit on the sidelines while the market drops and then recovers leaving them to buy back in at higher prices.

Don’t believe me? No worries, at least for me. Go ahead. Give it a try, and learn the hard, expensive way.

But this doesn’t mean we are without tools around here to mitigate the risk.

Those of you who have read thru the Stock Series know we think in terms of two life stages:

The Wealth Accumulation Stage, where we use cash flow to mitigate the risk

The Wealth Preservation Stage, where we use bonds or courage to mitigate the risk

Briefly, here’s how this works…

During the Wealth Accumulation Stage I recommend holding 100% stocks, ideally in VTSAX. During this stage you are working and have earned income. Since you are aspiring to financial independence, your savings rate is very high. Each week or month you are adding this new cash flow to your VTSAX fund.

Anytime the market drops, your cash buys more shares. On sale, if you will. Market plunges are a gift, even as this new cash flow serves to smooth the ride.

During the Wealth Preservation Stage we have two options.

1. We could add bonds to smooth the ride. That works like this…

Whenever the market moves enough, in either direction, to alter your chosen asset allocation you rebalance. This means selling what has gone up and buying what has gone down or stayed the same.

For instance, my allocation preference is 75% stocks/25% bonds. The run up in stocks shifted this allocation and once it reached 80/20 I rebalanced to bring it back. This means I sold some of the stock fund and bought more of the bond fund. If stocks continue to rise, I’ll do that again. Should they plunge, I’ll sell some of the bond fund and buy more of the now cheaper stock fund.

2. Or, instead of smoothing the ride, we could just use raw courage and endure it.

This means holding 100% stocks and just ignoring the wild and crazy ride. This is something my pal Jeremy is thinking about and he makes the case here:

However, this is not something to consider if you are using the 4% rule and you need every penny to make ends meet, and unless you are absolutely, positively certain you won’t panic and cut and run during the next market crash, whenever this might be. Jeremy meets both these tests.

In fact, unless you lived thru the Crash of 2007-8 and stayed the course, I’d advise against even thinking about this. It is easy to say you’re tough enough sitting on top of this great Bull. But it is an entirely different feeling when the world appears to be collapsing around your ears and all the “smart money” is lining up on the window ledges.

Trust me. I failed in this myself in ’87, and never could have stayed the course in 2007-8 with out that costly lesson under my belt. A hard eyed assessment and a little humility regarding yourself can save you a lot of grief and a ton of money.

Bottom line

So, if you are aggressively adding cash each month to your VTSAX account you can smile if and when the market drops. As you can when you reallocate if you hold bonds.

If you are 100% stocks and living off your portfolio, like Jeremy plans to, you’ll just grin and bear it knowing this day would come and this, too, shall pass.

As for me, I’ve been thinking about following Jeremy’s idea. A nice, sharp market plunge would be just the thing to move me off the dime. Maybe if the market drops 10%, I’ll move a third of my bonds into stocks. If it goes on down 20%, I’ll move another third. If it drops 30%, I’ll move the rest.

I realize I have touched on politics in this post and hopefully I’ve done it in such a way that my own political views remain obscure.

I saw no other way to discuss the market’s recent moves. But this is NOT a political post and I don’t want the comments on it to become a political cesspool. There are enough of those out there already.

Any partisan political comment will be deleted and any partisan political points embedded in an otherwise useful comment will be edited out.

Thanks!

************************************************

Some books for your consideration:

Non-fiction

Yuval Noah Harari has become my favorite non-fiction author and this…

…might just be my all time favorite non-fiction book. A close second, which I’ve just finished, is his…

Both are extremely well written and a pleasure to read. Especially, if like me, you are interested in where we came from, where we might be going and why we believe and do all the silly crap we believe and do.

Mr. Money Mustache brought this one to my attention with his review. He calls it “This tiny and simplistic and charmingly outdated book from the 1950s completely changed my life.” We’ll have to take his word for it having changed his life, but the rest I can vouch for.

Great concepts and principles, wrapped in a 1950s sensibility that’s like climbing into a time machine. Interestingly, Schwartz routinely refers to female executives in his various examples and stories. Such creatures were not all that common in the ’50s, but then neither were a lot of his cutting edge views.

I wish, like Mr. MM, I’d come across it as a teenager.

Fiction

A friend of mine originally from Minnesota recently introduced me to two book series, each set in that state. These are entertaining reads in the crime/detective/adventure genre. Both have a central character, along with supporting characters that reoccur in each book.

As he suggested, I am reading them in order, and here are the first book from each series:

Sandford is probably the better writer, although I find both engaging. But Krueger’s characters are more interestingly drawn. Either is a fine way to pass a quiet evening after a long day.

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Comments

Any particular reason why you always recommend VTSAX and not ETFs for instance? Any advantage of holding funds instead of ETFs that we do not know? All the others advocate in favor of ETFs as being more tax favorable so I keep asking myself why the great jlc like VTSAX so much !

Title “What if you CAN’T buy VTSAX”. Article is written assuming VTSAX is not an option – why would it go into great depth there?

The advantage of VTSAX over VTI is lower costs. “But they have the same ER” you say. True, but in addition to the ER, you pay the bid-ask spread every time you transact an ETF. Cost is small, but non-zero.

Then an ETF may be trading at a premium or discount to net asset value. As an individual investor, you have very little control over this – you might wind up buying at a premium and selling at discount. The opposite could happen too.

On an ETF with good liquidity, like VTI, both of these things are minimal, but they are still there. VTSAX is typically a slightly cheaper way to own the same fund.

ETFs and mutual funds have some subtle differences, but for most purposes they work the same way. Here are some of the advantages and disadvantages of ETFs:

ETF Advantages
1. Minimum purchase amount is lower (e.g. 1 share vs. $3,000 for VTSMX)
2. ETFs can be traded before the end of the day, like a stock
3. Expense ratios can be slightly lower than the mutual fund version

ETF Disadvantages
1. Cannot purchase fractional shares
2. Automatic investing may not be available
3. Trading ETFs may cost you commission, bid/ask spread
4. Prices fluctuate throughout the day
5. Can only be held in certain types of accounts (e.g. brokerage)

I couldn’t agree more Jim! I have been telling my friends and family the same message in response to questions about what to do with the market being “overvalued”. I tell them to just keep the big picture in mind and to keep saving and investing. As you pointed out, if someone does try to “time the market” they have to guess correct not only when to buy but also when to sell. And since no one has been able to consistently make money timing the market I think I’ll spend my time on other things that I am much more likely to succeed at. The basic principles of investing never change! Keep up the good work!

Do your friends try to time the market? I have only one friend who has ever done this, and each time he’s been on the wrong side of the bet. Lucky for him he’s frugal and he’s made a lot of money over the years, so he still has a fair amount of wealth in spite of himself.

You guys may consider taking a look at this article that highlights some simple techniques to “time the market”.

To me, timing the market means having a strict definition of “trend” then buying uptrends and selling downtrends.

Buying after a market starts moving up may work better than trying to predict when the market will move. I think when most people talk about “timing the market” they mean “predicting what the market will do next”. In my experience, reacting works better than predicting.

Mr. Collins, you are the man! Excellent post. Just what I needed. We’re allocated about 75/25 (Mostly VTSAX and VBTLX, but were starting to waver since our retirement timeline is about 11 months. Thanks for your wisdom.

I liked this research because it provided data to back up all the things (and more) I’ve been thinking about that could happen and would nullify the 4% rule and render me destitute. My takeaway is that the sweet spot for stock/bond ratio is between 70-80% and if I can follow a 3.25% rule, I should be ok. There is a lot of detail and great analysis contained in that information. I’ve read it through a couple of times but my little brain is still digesting it all.

Personally, I can’t help but think that I am about to “early retire” right when the sequence of returns risk is off the chart (retirement date June 30, 2017). But I’m still going for it!

JL, thanks for sharing your wisdom. As an “older guy” myself, I find myself telling the “younger folks” at work that the best thing for them would be a full on, raging bear. “Don’t stress, just keep dollar cost averaging.”

With 1 year to go til retirement (I’ll retire in June 2018, at Age 55), I’m selling some winners to start filling Bucket 1 for my Bucket Strategy. Aiming for 3 years, safe and liquid. Love your work.

Very timely and much needed post Jim. You hit it on the head to succeed at this market timing thing you need to be correct when you sell and correct when you get back in. I’m sure there are still some investors who hightailed it out of stocks in 2008 and are still waiting for the “right” time to get back in.

If you’re investing for the long term, market swings should already be baked into your plan.

Also, if I have some cash sitting around and there’s news of a crash, would it be better to ‘wait’ for it (given a ceiling of X days/months) and buy index funds low/cheap? Or would I just want to proceed with buying regardless of market conditions? Generally, I know it’s wise to avoid timing the market, but is this a case that would make sense in terms of “waiting to buy low?”

Just read through this chapter in your book and loving it so far. I think where people go wrong is mixing the idea of investing with trading (or gambling). As you’ve said the market bias is always higher, so if you do for whatever reason have a strong feeling that the market is going to drop, then at least give yourself a “stop-in” point to buy stocks if you turn out to be wrong. Given we are 2.5% or so off of the all time highs in the S&P you could take the view that you’ll buy either on a 5-10% correction lower from these levels or if you’re wrong, you’ll buy on a move back through 2400. As long as we fully acknowledge the lower probability of actually being able to buy 5-10% lower and realize we are “trading” instead of “investing,” then it may make sense to use a strategy like this from time to time. Although it is probably easier to just stick to playing poker with your buddies once a week and let the market do its thing.

OK, even though I knew what you’d say I had to read it anyway :). Thanks again for the wisdom. Remarkably for me, I was able to sit still through the 2007-2009 crash and let it all come back in spades. I’m at a 70/30 split (VTSAX-70, & 3 bond funds @ 10% each), withdrawing and successfully living off of 3.9% now, but I have to admit I’m a tad nervous about the coming slump anyway. That is hilarious about the Fidelity study, I have to google that one and share it. Thanks for the books recommendations, I heard Yuval on Sam Harris’s podcast (Waking Up) recently, which I highly recommend as well.

The first 12 minutes or so Mr Harris spent complaining about a previous guest and the public reaction to that podcast. Then he went on a long-winded guilt-throwing pitch for listeners to support his podcast financially.

Overall, it made a very poor impression and had I not been so keenly interested in Yuval I would have stopped listening.

I’m glad I didn’t as Mr. Harris actually did a fine job with the interview and Yuval was every bit as fascinating as I had hoped and expected.

Benjamin Graham has stated that one should never hold more than 75% or less than 25% in bonds. I’m personally OK with a riskier allocation, so I hold 90% stocks and 10% bonds.

As I transition into retirement, I plan to transition to holding a number of years worth of expenses in bonds. If my portfolio grows throughout retirement, which is the most likely outcome with about a 3% withdrawal rate, I expect to have a decreasing percentage in bonds as time goes on.

I had a low 4-figure sum invested in stocks in 2000 and a low 6-figure sum in 2008. When the next Bear roars, I’ll have a 7-figure sum, and I’m confident I’ll ride it out like I have the others. I’m not gonna lie, though. It will hurt a bit more.

I have been pondering a “safe” strategy at retirement, and I was curious if you thought it was a good or crazy idea.

I am 50 now. At 65, my nest egg should be 5M. I am pondering taking 1M, buying a 20 year immediate annuity, which estimates to pay out $5500/month (with a guarantee of at least 1M paid out to heirs if I die).

With that “safe” $5500/month plus combined SS (including spouse) of about $3000 or so, we’ll have a healthy $8500/month guaranteed for 20 years. That is more than enough for us to live on (house is already paid for).

Then, with that 20 year window, the 4M left over goes to 8M, then 16M (estimated) by 85. My goal was never to spend all my money. I’m looking to leave wealth to my family in trusts so it can’t be abused.

So, outside of how you may or may not feel about leaving the wealth, do you think that is a solid plan? I’ve considered bonds and low safe withdrawls, but I always come back to the annuity seems MORE guaranteed, and I would never have to sell low over that 20 year period. Thoughts?

Jim – You suggest that “We could add bonds to smooth the ride.” No argument but, some more detail might to helpful.

Elsewhere, you have written that for your bond allocation, you use the Vanguard Total Bond Index Fund, which has an average duration of 6.0 years and an SEC yield of 2.46%. By contrast, the Vanguard Total Stock Index has an SEC yield of of 1.77%, so you’re not getting much more income for a smoother ride.

For bond investors, interest rate risk is one consideration. Duration is an important metric to understand in order to manage this risk. Perhaps you’ve covered duration in your blog but if so, I didn’t see a link for it.

Generally, for every one percent increase in interest rates, the fund will decline by X% in value, X being equal to the fund’s average duration. And when interest rates decline…bond values increase.

So a 1% increase in interest rates means Vanguard Total Bond Index fund would decline 6% in value. Well short of routine 10% “corrections” in the stock market, but bond funds are risky.

The yield on ten-year Treasuries was 2.32% up from 1.74% a year ago. Where will interest rates go next week, next month, or next year? Who knows? Predicting the movement of interest rates is only slightly less problematic than predicting the future of the S&P 500, the Dow, or the Russell 3000.

We are still at fairly low (by historical standards) interest rates. And, of course, we’ve had about a 30-year bull market in bonds as interest rates dropped from historic highs. You mentioned the lesson you learned from the stock market correction in 1987, which was about when the bull market in bonds was taking off. In 1982, the yield on ten-year Treasuries was about 14.6%, in 1987, they were about 7%. See: http://www.multpl.com/10-year-treasury-rate/table/by-year

When interest rates increase, the value of Vanguard Total Bond Index Fund will decrease. I think this is a very fine fund, but it is not without risk of declining in value.

Bonds are historically much, much less volatile than stocks. So you’ll smooth out the ride versus the S&P 500 or the total U.S. stock market for sure.

That said, interest rates are still pretty low. Actions taken (or tweets sent) in Washington D.C. by the president, Congress, and the Fed impact interest rates. Don’t know if that means they’ll go up or down next…

I love bonds but hate bond funds. I think that once your pile is big enough and you can create your own portfolio of holding the actual bonds that is the way to go. Yes they “decrease” in value when marked to market but if you hold them to maturity who cares. I totally agree with everything Jim has said above, I do think there is something to be said though to “if you’ve already won why play the game”. For me my 30% of net worth bond portfolio covers my living expenses plus some, the rest I let ride. Good first world problems to discuss!

Thanks for the recap of what the market has been doing lately. I hadn’t really been paying attention other than noting my net worth was going up faster than normal. I’ve been a bit busy with getting my first rental property all sorted!

But like you say, I’d love to score some sweet deals on stocks! Now is the time for youngins like me 🙂

I think good investors, just like good computer programmers, and fundamentally lazy ones! They do the least amount of work required to get the job done well, then step out of the way so their creation do its thing without further involvement or tinkering.

Your observation about dead Fidelity investors performing the best tends to support this. Apathy wins out (providing it occurs *after* the investor has invested, rather than while they are sat on the sidelines).

Thanks for the reminder Jim. I’ve been thinking a lot about my asset allocation recently. My wife and I have reached a significant milestone this past year as our net worth went into seven figure territory after only four years downsizing, hard work and serious saving/investing. FU money for sure, but not quite financial Independence by our own definition. We are getting close, however, and it had me thinking about going into preservation mode and increasing the bond allocation. On the other hand, we are still relatively young (40s) and could choose to keep working if the market does take a turn for the worst, at least part time anyway, to keep from drawing down or portfolio in a down market. So, I’m going to hold at my current agressive asset allocation. I was intrigued by Jeremy’s article on going 100% equities when he first wrote about it. Considering he is retired, I thought he had balls of steel for considering it and was hoping he hadn’t become a victim of recency bias due to the strong market that helped him reach FI. He did make a strong case for it though.

Thanks again reiterating the wisdom that we need to be reminded of from time to time. Rehashing this stuff never gets old for me.

Schwab has come out with an total stock market index fund SWPPX at 0.03% expense rate compared with 0.05% for VTSAX. Do you think its worth moving to schwab to reduce the expenses even lower? Or am I missing any hidden fees in SWPPX

If you’re starting a brand new account or investing new money and you have a lot of it, it might be worth giving Schwab (& Fidelity) a look. Also, look at other funds available and expense ratios on those. I do know both have undercut Vanguard slightly on the Three Fund Portfolio funds, but tend to have higher expenses on other funds.

Vanguard drives down fees as a matter of corporate culture hardwired into their DNA. The others only do it when forced to by competitive pressures. That alone is enough to keep me loyal to Vanguard, even if some other is slightly less.

Vanguard’s index fund success has forced the others to do the same, with some funds, to be competitive. They use these lower cost funds as “loss leaders” to keep you or to lure you into the door. And, they can raise those fees whenever they so choose and will the moment they think they can get away with it.

If you hold the fund in a tax-advantaged account, this is no problem. You can just switch back to Vanguard or another lower cost fund with no tax consequences.

But, if you hold the fund in a taxable account, you could find yourself sitting on a sizable (and taxable) capital gain if you move it. So, you might be trapped in the higher fees to avoid the even worse tax hit.

Other than that, the truth is aa index fund is pretty much an index fund, regardless of the investment firm.

One of my biggest early mistakes was mixing insurance and investing and paying a 3% load, .4 fees and an 8 year period where there is penalties if I withdraw. As far as big mistakes go, it’s better than an expensive house but always reminds me how easy it is to make mistakes at the beginning.

You might be interested in my email response to a friend regarding mixing insurance and investing:

“Regarding Universal/Whole life insurance, these are products that combine insurance with an investment. Other than insurance sales people, like Wendy (his agent), I have yet to see anyone say they are a good idea. In fact, most say they are a terrible idea. But they do have very high fees and commissions for the insurance company and their sales people.

“The only kind of life insurance people not selling it recommend is Term: Far cheaper because you are only paying for the insurance part and far lower fees.

“But even term life insurance is only for those who need the benefit to protect their family if they die and their income is gone. But you are FI and so if you die, Amy and Venice will surely grieve and miss you terribly, but financially they’ll be just fine. You don’t need any life insurance. Neither do I, nor do I have it. Before Jess was born and we were independent Jane and I both worked. If I died, she still had her income just as before we were married. By the time Jess was born, we were FI and so didn’t need it.

“Unfortunately, you already have it and figuring out how and if to unload it is above my pay grade. I just don’t know enough to offer any guidance I’d be comfortable offering.

“I will say, Wendy didn’t do you any favors. She sold you something you didn’t need as insurance and that no objective observer would recommend as an investment. In doing so, she generously lined her own pockets and those of the insurance company.

“Now, in fairness to Wendy she maybe a true believer. Insurance companies seek out newbies they can indoctrinate. Indeed, the strategy is the company sells the agents first and then turns them loose on the customers. Like a cult. 😉 “

JLC – I just saw this because your full post links to it. I had the opportunity to share my mistake with a close friend this week. He was going to meet with a “financial planner” to ask advice. I told my story, begged him to stay out of the wolf’s lair and got him to go see a CPA instead. Win all around – unless you are the financial planner.

I just googled the Fidelity study of accounts of the dead and I couldn’t find anything that they actually published, but I did find this Business Insider article about it, and it made me laugh out loud and have a lot more respect for Business Insider for publishing it. No need to read the whole article, just scroll to bottom, read the last sentence, and check out the graphic. Pretty hilarious!

Hi Jim! Just to make sure I understand – when you say that in the The Wealth Accumulation Stage you “use cash flow to mitigate the risk” – you are simply referring to continuing to continuing to buy stocks through the bear market with the same aggressiveness as you did during the bull market. In other words, don’t stop investing or don’t start investing less (i.e. saving up more in cash). You’re not referring to anything else when you use the term “cash flow”, right?

We are financial nerds, no doubt about it. Because no one else would find that entertaining. I on the other hand got a laugh picturing the little boy in the movie saying that with those big bulging eyes. Lol.

Nice article Jim. The more I read about the stock-bond allocation interplay and how to decide your personal allocation, the more it makes sense. Thanks! Benjamin Graham’s discussion of this in The Intelligent Investor was one if the bigger takeaways for me. He argued back and forth and often landed on a 50-50 split as being a reasonable choice. I only invest in stock funds with my retirement accounts, so at 37 I am still all in stocks and probably always will be since I have income for expenses through real estate.

Jim,
In the last couple years it seems like I see more and more articles/blog posts from Vanguard about the importance of international stock index funds and why they are important for diversification etc.. The gist of it seems to be that while US market may be overvalued the international market is not -when one is down the other may be up, I guess. With so much respect for Vanguard I find it hard not to follow their advice. For years I have followed Jack Bogle’s and your advice about VTSAX (Vanguard total stock market index) being enough international exposure. Has your opinion changed at all about the need for an international fund/etf such as VXUS total international stock index fund? Thank you for your time and guidance over the years.
Kane

I have a child going to college in the fall and one that will be a jr in HS. I have $120k in 529 and ESAs for each child that are in Vangard funds about 70% stock and 30% bond. I am thinking about taking at least 50% and moving to cash. Their undergrad college costs will be about $120k each so I have reached the goal. Maybe I should move 100% to cash? Any thoughts on this?

Thanks for the feedback. I think I knew the answer, but had to hear it from an outside source. It is odd to put anything to 100% cash because the focus has been on growth for 30+ years. Part of it is that the hunt is more fun than the catch. Part of it is admitting that our kids are going to college soon (i.e. we are getting old).

“The rule of thumb is: If you’re going to need it within 5 years, keep it in cash.” – Wanted to jump off this statement Jim and ask a related question. What do you think about keeping your emergency fund or F-you $$$ invested in a place like Betterment? They make a pretty convincing argument for investing your rainy day fund rather than keeping it in a traditional savings account on their website.

Since the New Year I have shifted my asset allocation to 90/10 stocks/bonds and spent the rest of my time trying to mentally steel myself to ride out a big drop. I think mental preparation and setting up a strong system that runs on autopilot are much more productive than all the worry the media has been peddling. At this point I am looking forward to the “promised crash” with a mixture of trepidation and excitement.

I plan on staying the course and investing my normal amount every time my paycheck hits my checking account. I’ve been debating whether or not I want to throw my extra savings into the market if it does drop 30%, or keep it for what it’s intended for-a new(to me) car when I finally need to replace mine. Tough choices!

I am almost done with your book and have loved every second of reading it. I’m one of those people that never thought that I would willingly choose and actually like reading a book about finances, especially since I am somewhat newish to the FI mindset, alas I am hooked. I have recommended it to so many people since I started too.

I also just wanted to let you know that I have been lazy, I mean taking your advice, and not paying attention to market. Account? What account?

Just want to say, I’m a huge fan of your blog. It has been tremendously useful as I used to have an advisor manage my money who kept underperforming the market and after reading your blog it made me realize I should just do the investing myself and keep it super simple.

Had a quick question though. My portfolio is in the low 8 figure range and I talked with different advisors and they have differing advice on what % to put in equities and what % in bonds. For example, one says that the marginal utility of additional wealth is way less than a loss at this point since I can live off of the portfolio assuming 3-4% withdrawal rate, so better to be 30% equities / 70% bonds. (I’d be happy with a $300k/year spend. I’m also 34 years old). But your blog basically says 30% equities is too low. So I’d like to hear your thoughts on what would be a good % at this point for me.

I’ve heard anecdotes of stories like a couple in 1999 who were worth $15m and put most of their net worth in tech stocks, thinking it would double, and they lost 80% and never got it back. And afterwards reflected and thought they really didn’t need such a high % of equities given that they would have been happy with what they had already, so really regretted it.

…I l-o-v-e your question!
and am surprised it has never been asked here before. But I have even thought about writing a post along these lines as my view is so out of step with the mainstream.

Let’s dispatch with your 1999 couple first: Their mistake wasn’t a high allocation in equities, it was a high allocation in one sector. This, like investing in one stock, is extraordinary risky as they sadly discovered. It is also why I recommend VTSAX, a TOTAL Stock Market Index Fund.

OK, back to the main course…

The vast majority of advisors and writers on this subject would agree with the advice you received:
Once you have more than enough, focus on preserving it rather than growing it. Indeed, my personal hero Jack Bogle himself does exactly this with his own investments.

If you listen to the very end of this podcast:http://farnoosh.tv/episode/j-l-collins/
Farnoosh asks me what I would do with $100,000,000 if I suddenly had it. My answer:
I’d immediately put it in VTSAX.
As you’ll hear, she is a bit stunned by this, although mostly I think because she was expecting the same sort of list of things I’d buy like most guests.

But my thinking is that, even if the market plunged and cut it in half…
1. 4% of the remaining 50 million would be more than enough
2. The market would come back and go on rise ever further.

Remember, stocks aren’t risky in the long-term, they are only volatile in the short-term.

Certainly it is true that once you have more than enough, you don’t have to take risks or accept volatility. But, also, never before has accepting volatility been so, well, risk-free.

Consider your situation:

—The lowest 8-figure sum is 10 million, so let’s say that’s what you have
—4% of 10 million is 400k
—You only need/want 300k
—7.5 million x 4% = 300k

You could lose 25% of your 10 million and not break a sweat.

You are certainly well positioned to forget about growth and focus on preservation. But you are also well positioned to even more aggressively focus on growth.

So, which is best?

Well, in terms of your lifestyle it really doesn’t matter much. You’re well covered either way. But are you only managing it for your own needs?

In my case, I am managing my wealth first for my own needs and those of my wife. But not exclusively.

I am also managing it as a legacy. My heirs, be they individuals or charitable institutions, have a long-term horizon and they benefit from a focus on growth.

Your wealth will outlast you. Managing it comes down to:
are you thinking just about yourself and your lifetime or about where it will go and what it can do beyond that?

Great points! It would just be for my needs as I’m currently single with no kids, but then again that could change in the future. I prefer to die with very little money, but at the same time I don’t want to live my last years worrying about running out of money, and it’s hard to predict exactly when you are going to pass away. Also I forgot to mention, I also have a $9m primary residence that is 100% paid off that I have to pay property taxes, maintenance, and insurance for every year which ends up being around $100k/year. So the $400k/year actually ends up being $300k/year unfortunately. (If I had read your blog before I bought that I probably would have chosen to be a renter, but now it’s too late since the transaction cost of selling that is 5% agent fee + 2.5% transfer tax + capital gains….so, huge).

I brought up that stocks in the long run are actually safer than bonds to that advisor who recommended 30% stocks, but he said that I’m assuming stocks always go up which is not necessarily the case. For example it took somewhere around 22 years to get back your capital (which includes dividend income) if you bought the S&P in 1929. Yes you eventually got it back but 22 years is a long time of suffering..

Agreed that you’d have to be really unlucky to buy at the worst possible time in 1929 to have to wait ~26 years to have fully recovered. So probability wise the chance of that happening is very low.

I’m thinking then probably 50% stocks/50% bonds is a good allocation for me or maybe 60% stocks/40% bonds. Was thinking stick with 50%/50% for now but if there’s a large drawdown in equities switch over to 60% stocks/40% bonds, or even 70% stocks/30% bonds if there is a 40%+ drawdown in stocks. Then if people start getting euphoric again like back in 2007 or 1999, go back to 50%/50%. I always wondered why people don’t start with the more conservative asset allocation and then if there’s a big crisis over-rebalance on the equities..I guess it’s a hard thing to do psychologically.

Calidude – one thing to remember is volatility IS your enemy when you’re taking income. You can have two “identical” investments earning x%, but if one is more volatile it can actually perform worse if you’re taking withdrawals. The way to think about it is if an investment ALWAYS made 4% every year and you were taking our 4% a year, you’re good to go. But if you have a heavily fluctuating investment averaging 6% you may end up with less money in the end due to the withdrawals on the dips. That’s one reason why total returns only tell part (albeit an important one) of the story. Bonds aren’t your enemy, they just need to be used for the emotionless reason of beneficially reducing volatility. Not so important while adding, super important while subtracting!

Thanks for this excellent post. I am not too worried about my ability to ride any future downturn that may (or may not) happen. Although I haven’t really experienced one yet. I did have investments in a 457 at work through the downturn in 2008, but that was before I was educated so all my money was in high cost mutual funds and even though it was a 457, I didn’t realize it at the time so I didn’t think I could get to the money and so I never had to face the temptation of selling. I’m still a while away from FI, so maybe I’d be more concerned if I was closer to quitting my job. Nonetheless, I appreciated reading this as it helps keep the focus! I’ve also stopped checking my accounts so frequently. Early on it seemed like I was looking fairly frequently, especially when bored, but now I try to only look once a month (for tracking purposes) and may downgrade that to once a quarter if the market indeed takes a turn.

My goal if/when it happens is to focus on how much more the money I’m saving is buying.

Thanks for your calm and sage advice. I also appreciate you keeping this non-political. It’s nice to have a space like that.

““I have a lump some to invest, but this market looks to me like it is about to crash. Should I wait?””

I get that question a TON. I even had one guy that wanted to pay me $125/hr consulting fee to discuss this question. Here was my (free) response along with a suggestion to save the $125:

“In general, it’s best from a mathematical standpoint to invest all your lump sum up front. But that puts you at risk of taking a loss if the market happens to be at a top right now. No way to know we’re at the top until AFTER it drops, so it’s all a guessing game. One approach is to dollar cost average in on a monthly or quarterly basis over the next few months or a year. Not a whole lot of risk in waiting other than missing out on the gains in the next few months or year or so till you get fully invested.”

I like your reference to bonds – got to get the asset allocation correct so you can withstand market volatility in the first place!

The best explanation I saw of “what should I do with a lump sum?” was some comments somewhere on MMM or bogleheads, if I recall correctly. Someone responded “What would you do if your cat jumped on your keyboard in five minutes and managed to sell everything you had invested? Wait and slowly re-invest it, or just immediately buy back what the cat had screwed up?”

There’s probably some capital gains/loses details that aren’t particularly relevant to the metaphor, but to a novice that was the moment where “no, stop trying to time the market, and yes futzing around with investing a lump sum is trying to time the market” really clicked for me.

…not the least of which is that DCA is designed to avoid the pain of investing your lump sum and having the unfortunate experience of having the market plunge the next day. Of course, once you have painstakingly and slowly deployed your lump sum over time, the day after you invest your last chunk could be the day the market plunges. 😉

We’ve been getting lots of questions about “the upcoming crash” too. Clearly they have not read Chapter 6 of your book: “There’s a major crash coming…”

Whenever it comes time to invest, novice investors only have one of two thoughts:
1) The markets are overvalued. You’d be an idiot for jumping in.
2) The markets are crashing. You’d be an idiot for jumping in.

Kudos to you for having the patience to explain everything again rather than just tell them “read the book, stupid!” That’s why you’re the Godfather! 🙂

On a separate note, I am a huge fan of your blog and recommend your book to everyone who will talk to me. Thank you for your contributions to the personal finance space and the great benefit your writing has brought to my life.

Just go with ITOT in the US..it’s cheaper than VTI or VTSAX and also helps w/ diversification…I have a bad feeling with Vangard growing so fast..they’re so big now that..it’s just scary the power they have w/ $4 trillions under management.

I won’t dance out of the market but there is no guru in this world that will make me put my 30% cash in the market before it plunges at least 20% . Period ! So much work for this money that I cannot afford to lose a penny!

People lose on the market because of a) Fear b)Greed. They’re either too fear or too greedy to invest. And there’s always either ‘too high’ or ‘to low’.
Thanks again for reminding about staying calm. Stay calm and keep investing!

Great content. A recession or market correction will come just as night follows day. Nobody knows, however, when it will happen. I follow your approach of keeping some of my assets in bonds to smooth out the ride. That is just for my comfort level. Everyone is different. The ride is also smoother if you avoid the financial media.

Excellent advice as always, Jim. We just got six figures to invest from our last house but, sadly, are not brave enough to lump sum invest everything at once. We’re lump summing 25% and then DCAing the rest over two years, as we’re fairly close to FI and figured a little of the wealth preservation column was in order.

By splitting the difference, I figure we have a bit of a hedge (and a guarantee that we’ll kick ourselves for not just going full bore on one strategy or the other).

*I* am the jlcollinsnhinista in my family! I’ve been putting my money in VTI faithfully every month since 2014 (when I discovered you and GoCurryCracker!). I convinced my husband to open a taxable Vanguard account in 2015, and he deposited a large-ish lump sum of cash. However, he hasn’t bought much since that time. I finally convinced him last week to buy some shares because VTI was down over 3% off its high. He *could* have just bought it when he deposited that money at 22% off the high! Ugh! At least he maxes out his 401K every year and that automatically invests, high or low! He still has a third of that cash he deposited sitting in cash… sigh.

Your thoughts please – I hope this makes sense. Regarding the 4% rule, I never hear anyone speak of taking 4% of the balance as it rises and falls – meaning, whatever the balance is when you make a withdraw it will be based on 4% of the balance at that moment in time. It seems that usually folks will have, say, $1m and going forward always withdraw 4% of $1m even if the balance drops to $700,000.

To me it seems much safer to reduce your 4% to that of $700,000 instead of the $1m and always have your income a little more unstable. You would also get a bigger payday when the balance goes up. I’m self-employed so a variable income is nothing new to me.

As I understand it, you could follow either strategy. If you were to withdraw 4% based on the current balance, you’re going to have some lean years as well as some fat years.

Alternately, you can hit your target balance of $1M, and withdraw $40K per year, no matter what the market is doing. Some years you’ll be withdrawing more than you’re making, but as the market is always up, you’ll end up with more years where you make more than you withdraw. Your balance of $1M should remain relatively stable, or even go up slightly over time.

You of course have to take sequence of returns risk into account. If a crash hits at the beginning of your FIRE, and your $1M suddenly becomes $700K, withdrawing $40K is a bad idea, as your portfolio might not recover after that.

Jeff,
There are plenty of folks that have looked at it. A so-called “fixed percentage approach” can never run out of money as long as the fixed percentage is <100%. However, that does not mean that the fixed percentage will yield acceptable income throughout retirement.

In a nutshell, you are replacing a risk of portfolio depletion with the volatility (risk) of yearly income with a fixed percentage approach.

On the other hand, a safe withdrawal rate approach reduces or eliminates (depending on which set of rules you follow) the volatility of yearly income by exposing the portfolio to the potential for depletion.

Mr. Collins,
I am humbled by your compliment. Studying at the foot of the Masters such has yourself has been enlightening.

My deepest regret that I didn’t run across you before deciding on my name for posting on sites like your veritable cornucopia of knowledge. Had I done so, I would have chosen the more appropriate appellation of DrFURE. 😈

Thank you Jim, I too am humbled by the compliment. I’m a recent convert to the FIRE movement, and your stock series has been an incredible asset in helping me to understand investing and how to make my FIRE dreams a reality!

Ha, I knew it!! When I dumped all my house sale proceeds into VTSAX all AT ONCE two years ago, I told you I’d be waiting for you to announce the “sell, sell, sell” on your blog 😉
I knew it was going to happen eventually 😉 Knew it!! I’ll go ahead and log into Vanguard right away!
What wait?
Never mind….

On a more serious note, when I FIRED last year, I did move my allocation from 92/8 stocks/bonds to 75/25 stocks/bonds and that definitely helps me sleep better, now that I have no more earned income to put into the market. Yes, in hindsight my 92/8 portfolio would have probably performed better over the last few months, but I probably would have checked on it ALL THE TIME, instead of ignoring it like one of those dead people 😉
No I can pretend I am dead while living the life!

Whenever I get nervous, and nervous I have gotten a couple of times, since quitting my job, I just start reading through “The Simple Path to Wealth” again and again…..it’s like therapy. A LOT OF hours of THERAPY for not a lot of money. What a great investment that book is!

“Whenever I get nervous, and nervous I have gotten a couple of times, since quitting my job, I just start reading through “The Simple Path to Wealth” again and again…..it’s like therapy. A LOT OF hours of THERAPY for not a lot of money. What a great investment that book is!”

Done 😉
Been meaning to do this for a long time. Amazon says it’s still under review though.

Still owe you one on the blog too. Not that it would make any difference as the Who-Is-Who of FIRE bloggers already have raved about your book, right when it came out! I am just too slow for you. But I have been telling lots of folks about it in person!!

I’m extremely new to investing and I’ve been reading your blog for a while now and I’m ready to go in on VTSAX. I didn’t grow up in the States and I’ve been learning about the tax advantaged buckets and the pros and cons of each. I have an extremely elementary question to ask at this point. Once I’ve rolled over my 401k from my previous employer to a traditional IRA at Vanguard and contributed the $ limit for the year, how do I keep adding to VTSAX as i see you mention around the blog? Does the rest of my investment go into a taxable account that I’ll keep paying taxes on the capital gains?

Each year you will have to pay tax on dividends, currently about 2% for VTSAX and any capital gains distributions. The latter come from management trading within the fund. Since index funds like VTSAX rarely trade they rarely pay out these.

Asia for January, February and the beginning of March happened followed by a ton of stuff to catch up on and tomorrow we head out again. It was a victim of my schedule and of being a time-consuming bear to pull together.

Too bad as this would have been an exceptionally interesting year for it.

Thanks JL. I agree, it is best to have a very high allocation in stocks when accumulating wealth. Staying the course and buying stocks (preferably Vanguard funds) regularly is the best strategy. I like it when the market drops because more stocks can be purchased!

I recently had the privilege to hear Jack Bogle speak at a local university hospital and he gave pretty much the exact same advice you give here to the assembled nurses, doctors, and administrators. He also made a point of saying something to the effect of – “Don’t be so worried about all the bumps in the road of life – the bumps ARE life!”

“Before index funds, traders who thought they knew something others didn’t could turn a profit in transactions with less informed buyers of individual stocks. That disadvantaged cohort now buys ETFs, locking up securities that traders once could pick off when price discrepancies arose.”

In other words, it’s harder to find suckers to fleece these days. Weep for the poor active managers.

Thanks Jim. For clarification though, wouldn’t you say that your statement below constitutes attempting to time the market?
————
As for me, I’ve been thinking about following Jeremy’s idea. A nice, sharp market plunge would be just the thing to move me off the dime. Maybe if the market drops 10%, I’ll move a third of my bonds into stocks. If it goes on down 20%, I’ll move another third. If it drops 30%, I’ll move the rest.
————
I must confess I was surprised to see you say this. After all, I thought your entire investment philosophy was based on set it and forget it principle. It seems like you’re trying to quantify in mathematical terms what would cause you to act or invest in a certain way.

You had mentioned that the market is inherently unpredictable, but as we know, will trend upward over time due to inflation and the fact that market is the go-to investment vehicle for trillions of dollars of savings and pensions. However, it seems that your statement implies that timing is possible, as long as you just pick a percentage that your brain believes indicates better value (in this case, 10% – 30%). If the market drops sharply though, you’ll be tempted to wait longer before getting in, and if it corrects at say 9%, perhaps you’ll jump in thinking 9% is close enough to 10%, only for the market to then drop to 15%. Classic market timing attempt.

For the record, I am 100% equities, but would never try and time my way into or out of a 100% position.

Right, that’s why I think deep inside everyone thinks the market is overvalued…but wait…even JLC affirms that sooner or later the market will correct so…let’s wait a little bit more…we’re not out of the market anyway

I have to disagree with you this time and take the sell sell sell route! and let me tell you, I have been holding off for several years waiting for the market to be at this point for the stars to align for me to sell sell sell even though I REALLY wanted to before but one thing or another held me off. And looking back, those irritating obstacles are now much appreciated for a variety of reasons. But, alas, the market is where I want it, the stars are in line, and I am in to sell sell sell! Wahooooooooooo!

Oh wait…you are talking about the stock market, aren’t you? Here I am on the housing market in my area. 🙂 The time has finally come to sell my house and I am ELATED to return to the world of renting! (and I guess that nullifies my beginning comment of disagreeing with you). Here’s to selling high!

Confirmation: I got out a month or so before Oct 1987. Smart, that. It was years before I got back in again. Dumb, that. I knew when to fold ’em, but not when to hold ’em. I think that there’s a temperamental problem here – the mental perspective that makes you a good seller (intuitional queasiness) is not what makes you a good buyer. Possibly even the reverse. So it’s a lot better to get in, stay in, and let your buy and sell predilections be disciplined to operate only in rebalancing once a year.

Great anecdote! Reminds me, my dad went all in with a big lump sum, ONE WEEK BEFORE the 87 crash, to begin saving for retirement. He lost half his initial investment. He freaked out, but didn’t panic — and stayed in forever. Now living comfortably off his IRA and social security. But, he’d be MUCH more wealthy if he’d put it in index funds like VTSAX and VBTLX and left it alone.

I have a recurring withdrawal to my Roth and figure my 401k per paycheck is my dollar cost averaging and don’t worry about it.
I let it ride through 07-09. 🙂
A pessimistic ‘friend’ got scared and took money out. He’s a glum Gus, and it’s not worth my time to tell him there’s a better way more than I have.
JL Collins for the win!

Like Pennies from Heaven…..
My 401k plan is held by Fidelity and administered by a smallish local pension admin company. Plan has been OK with good company match and mostly mediocre fund choices. Then, today, the quarterly Asset Allocation Bulletin arrives with comments as follows: “…we have decided to add a number of low cost Vanguard Index options to the program. …..All of these funds are part of the “Admiral Share class…” The funds added are VIGAX, VMGMX, VSGAX VVIAX, drum roll….VTSAX and VBTLX. Time to jump in and, now that I have been reading the JL Collins blog for a while, start moving money.

We are 100% equities, with the exception of our emergency fund. Even though I plan to retire soon, I will still be 100% equities due to my request for severance, which should be granted soon.

I figure if you’re going to ER, you might as well go out with a bang and ask to get paid for it. I do, however, plan on keeping two years of living expenses in a high grade corporate bond fund, in case the market tanks. I don’t wish to have to sell, although working or reducing expenses seem like much better options to me.

Hi. I just moved to the US to work for a Tech giant. I got a moving allowance and I would like to start investing in the stock market. I’ve never done that before.
I’ve read your blog and I get that the market always goes up but also other blogs say the entrance point matters a lot specially for someone getting close to retirement which means the time you enter is also very important.
I still ask myself if buying VTSAX now is wise for someone who hasn’t ride the bull market so far. Could you provide me with your thoughts. Much obliged.

Great article! My wife and I invest in VTSAX at Vanguard and a BlackRock S&P500 index fund in her 401(k) which only costs .02%. We weathered the 2008-2009 crash but at the time we were not educated as we are now with investing. I can say that we did not touch our investments. We are 38 and 42 and hoping for an opportunity at another bear market before we retire as crazy it this sounds. I read your book this past winter and enjoyed it. Thanks for all you do and helping make finance and investing simple. FYI, we do not own a bond fund yet but I think we will when we get close to retirement.

I do not agree with this article. It presents very rosy picture on market. Let us take a simple look at charts again. A general person carries most balances around 20-30 years in stock market as he generally have enough money in 401k in only early 30s.

Now, if a person kept his hard earned income of 100k in stocks by year 2000 (he worked all his 20 and 30’s to save 100k by age 35), it would still be 100k by Jan 2011. Almost 10 years, no change in price and no gains. That is because, we have seen two drops in those 10 years from 2000 peak and two gains to reach same position. All the gain in stocks happened in last 5-6 years only out of total 17 years.

Let us look total history of stocks. Our stocks are gradual gain until year 1996 (barring that 1929) almost depicting local GDP / country growth rates and other normal factors. From that time on wards, we have seen two sudden spikes and two even more drastic drops and one bull run for last 7 years. At same time, our GDP growth becoming sluggish to 1-2%. While all this happened, rich people networth increased a lot and normal people salary barely changed. Debt levels for both country and people are historically high.

How did this happen? This is because government near zero interest rates for so long. There is no incentive for people to keep money in safe place like bonds / savings accounts etc. Government policy is pushing people to put their money into stocks so that rich people can play with it and become more richer. But, i always believe in newton law -every action will have equal and opposite reaction. It means this induced exponential stock market growth for last 7 years has to come down in very near future to normal level. Look 2000 and 2007. This is exactly what happened. If stock market is not following the country growth pattern, it means it is not realistic.

However, i agree with one point. We can not and never will time the market. But, we can drop from the rat race when we feel it is too unrealistic to have this price. Take small gains before that drop happens and rest until we feel it reached bottom. It may never be perfect entry and exit point. Still it helps us to get more net worth than others.

I think market will correct at least 30% in very rear future (may be in 6-9 months).

3. What was the more profitable, on a risk adjusted basis, alternative to stocks during 2000-2010 when measured on a total return basis (dividends included) ?

4. Your last two paragraphs are non-sequitur. First you say no one can time the market and then you do exactly that in the last paragraph.

5. Your opinions on market value and interest rates do not make sense. On a price/earnings basis the market looks a bit expensive. However, at current interest rate levels it appears a lot less expensive. Warren Buffett agrees with this and I consider him a pretty good authority.

“Now, if a person kept his hard earned income of 100k in stocks by year 2000 (he worked all his 20 and 30’s to save 100k by age 35), it would still be 100k by Jan 2011.”

True, but you picked one very short time in history. As Warren Buffett likes to state, your holding period should be forever. That’s not really feasible because after all, we die! But, for an early starter, you’re going to hold your investments for many decades.

Now, it’s easy to choose short periods of time to prove something, but when you expand that time period, your trajectory is up. Go back to 1990 or 1980 and see what returns look like.

But I agree with you that low rates have juiced the market and there probably will be a correction. If your timeframe is decades as it should be, it will a blip on the radar.

Holding period should be forever…man..this is so untrue. I’m now 45 and I’ll put my first bucks in the Market…and will begin to use it in 5 years…in what world this is forever? this is the problem with generalization…nobody lives the same life therefore there’s not one size fits all…I’m not even sure I’ll invest in the market at all..just lived without it so far and have a pretty good chunk under my mattress that will support me for 40 yrs at least so why take any chances…

Point 1: Main problem is each blip takes at least 3-5 years to settle and reach to former level. I think if we continue investing in those blip periods , we are bound to lose money. This is particularly true to older people who are nearing 50s.

Point 2: A person history in stock market will be around 30 years. So, we should consider only last 30 years history to predict what happens next. Now, Stock market in USA changed drastically since 1995. What we saw until that period is slow and steady growth that matched GDP, consumer spending etc. What we saw after that is all just two peaks and two bottoms and one strong bull which was induced due to near zero interest rates. Current bull trend is because of PE ratio of market is more than any thing else available in market (bonds, gold, savings etc). Rich people really calling these shots through government policies. They are squeezing all money available from common people. Last 15 years, we did not see real wage growth while debt on common person increased three fold, while stock market doubling / tripling. I believe in wage growth or GDP growth causing market hike. But, we are not seeing it now — more so in last 6 months. It is not real and going to crash real soon to normalcy.

Point 3: There is never a perfect entry and exit point. We can never time it. However, we can be little more safe when we think so. This article advises to put 100% into stocks or 75/25. I think, it should be much more conservative considering what happened in last 6 months (15% unrealistic gain with out facts). I am now 50/50.

I inherited some stocks from my late father in India in 1993. I wanted to sell them right away, but managed to add them to my brokerage account there only after almost two decades of them sitting in some legal gray zone. Their value had gone up from x to 10x.

In 2013, the Indian stock market was in the dumps. I tried to sell them and my brokerage order just refused to go through. The company managing my brokerage account informed me that I would have to sign some extra documents to facilitate that process.

So I forgot about them. I went back to India in 2014 and they were up 50% to 15x. I sold them. 🙂

I have been reading your blog for a while and wanted to see what you or your fellow bloggers thought about my particular situation.

I consider my self fairly financial savvy with good personal finance knowledge. I believe in index funds and love vanguard. I did not have a lot of cash outside of retirement accounts during the financial crisis of 2008 which was a perfect time to get into stocks. Over the last 8 years, I have been successful to amass 500K in cash outside the retirement accounts. While i am heavily invested in stocks in my retirement accounts, I didn’t do any investing in the non retirement accounts first to amass certain amount of emergency funds and then to have some cash cushion as well. At that time i had put about 250K in various banks at 3% .

But now with 500K in cash siting around and interest rates being where they are today, i am debating how to get back into stocks. Investing all at once in vangard sp500 while we are at new high seems strange to me. I have though about couple of ideas:

1. Invest $1000 a day in vanguard fund. it will take me about couple of years to dollar cost average into the stocks again.
2. Invest $5000 (for example) every time the sp500 drops 1% or more on a day.

Short of hoping for a crash which would be ideal if i a being selfish, i would love to see what you and your fellow bloggers would do in my situation.

You can also apply my situation to someone who just got some inheritance or won a small lottery or won big on the SNAP IPO 😉

DCA into it. Whatever makes you feel better. A few people here are talking about market highs like they know what is going to happen. I think Jack Bogle said it best, “No one knows nothing”. I might be off but pretty close to the quote. Just continue to DCA and get on with your life. We’ll have ups and downs in the short term but over the long term you’ll see the gains. Tune out the noise.

Surprisingly, I have never been asked this before and it is indeed my single biggest concern.

Overall, I am a major optimist about the American future, and that of the world in general.

But, at $20,000,000,000,000 and growing with no end in sight, it is hard to see how this ends well. And, of course, it is not just an US issue. Most of the world’s countries are adding debt seemingly as fast as they are able and many are in an even deeper relative hole.

Some economists argue that such debt just doesn’t matter and, as it is clearly not going away, we can only hope they are right.

Or perhaps, and this is my best guess, we will inflate our way out of it when push finally comes to shove.

If not, as with a nuclear war, it likely won’t matter where we are invested.

Could you give a little more detail on your thoughts on this? This bothers me too, and I’d be glad if you could allay my fears.

I have two questions: Why would economists say massive debt doesn’t matter? And what will be the consequences to the economy or the stock market if the United States prints massive amounts of money to pay the debt off?

Has anyone actually watched this thing. It starts out to make some sense but then she advocates the federal government giving away a bunch of money but not raising taxes. In other words we can spend our way with borrowed money into prosperity. Run the national debt a lot higher because we never have to pay it back since it’s fiat money. We just print more. And this woman calls herself an economist? I can’t believe people actually sit through this. Crazy!!!!

I had not yet started investing for the 2008 crash, but I was grateful in 2016 to start the year with so much volatility that quickly changed to growth. It gave me a taste of what a loss could look and feel like without giving me the caloric intake. I hope that I follow the advice I know to be good whenever the next corrections happen.

Hey Jim I just wanted to add to the list of thanks. I’ve been reading your blog since spring 2013. I also bought your book and read it cover to cover. I came to the retirement scene late in life but between lsitening to Dave Ramsey about debt and listening to you and The Bogleheads about investing I’ve managed to make tremendous strides and I’m retiring. The main thing I’ve learned from you is you can’t time the market and the market always goes up. I just had to toughen up cupcake and cure my bad behavior!! Oh and also to quit moving stuff around. I used to be bad about that! Thanks again.

BTW I’m 75/25 too. But my 25% is in a guaranteed 3% interest account at my 401k. I’m using your theory of if the market drops I can live off the 25% until it recovers. Ive got about 4 years there. I don’t understand or like bonds and I don’t believe bonds can beat 3% by much if any. The 75% is in VTSAX so let the big dog eat and forget its there. This is so much fun!

Jim, Great post as always and good comments and replies. I wonder if one has sufficient assets where you can live on just three percent or less of invested assets, why not have the entire portfolio be fully stocks? This way, even in worse case, this low withdrawal rate has supported a retiree sustainably without fail in all historical worst cases. Sure you have to put up with high volatility, but as you say it so clearly, it not true risk. This way, you have also positioned yourself for maximum growth in all other market scenarios and no rebalancing required.

JLC, in your book you say that debt is the vicious pernicious destroyer of wealth and much more wich I totally agree however the US debt is going up faster and faster and you advocate we should invest in the market more and more…isn’t it a little bit dangerous because the US debt as you point out cannot be considered normal. It’s debt and it will eventually hurt the investments and capacity of grown of the US economy….and what will happen when people realize the US is not the safe heaven anymore? What the market will do ?

I don’t try to time the market, simply deploy cash when I feel stocks are a bargain. Honestly I’m hoping to see the market tank. I have mostly DGI companies in my portfolio and I would love to be able to pick up some bargains like we had during the financial crisis. 1000 shares of BAC for $5.50 right when Buffet decided he liked the stock. Don’t mind if I do…

I have a question about VTSAX dividends when a Black Swan flies over Wall Street.

Suppose I have a portfolio consisting of VTSAX and cash. And I order my affairs so that VTSAX dividends and rental income cover all my expenses. Further suppose a market crash devastates share prices like 1929.

Will this cause the dividends posted by VTSAX to go down? I presume dividends would remain unchanged, allowing me to ride out the storm without selling any VTSAX at a loss. I might even use some of that cash to buy more VTSAX.

Your wealth-preserving portfolio allocates 20% to bonds. I wonder if this is necessary. Sure, bonds are a hedge against deflation, but so is cash. If I don’t care what my portfolio’s value is on paper, but just what it produces in income, any variance in share price should be meaningless.

If we have a major market crash, especially on the scale of 1929, the revenues and profits of companies will take a hit. Some will be forced to cut dividends.

At the same time, counterintuitively, the percentage tends to soar. For instance, right now the dividend for VTSAX is ~2%. During the Depression it reached close to 14%. But that 14% was created in large part by far lower stock prices.

Thank you. This suggests your wealth-accumulating portfolio (95%/0%/5%) could weather an economic hiccup as well as a wealth-preserving portfolio (75%/20%/5%) would, provided you are disciplined enough to only touch dividends. Since VTSAX is the entire market, there’d have to be a very broad long-term collapse to scramble my nest egg. If things get that bad, I can’t imagine safety in any other asset class.

Thanks for the great post, JL! I’ll be pointing people to this one when they ask me about the “upcoming crash.” Your point that I most love (which as I recall you elaborated on more in the earlier post) is one we all tend to overlook: even if we could predict the top (which we can’t,) we would also need to predict the bottom. No one is pretending they can predict the bottom, so what good would it be to know the top? Sure, it might help a bit, but you need both. I love that point – mostly because I forget it too easily 😉

It seems for ever crash article there is also a companion article about how this rally will last and last and last. It is hard to drown our all this noise, especially in our modern technology age, but investing success depends on it. Thank you for the great article.

Sell! Sell! Sell! it seems like Hell!. But you have posted the great content for people suggesting the best investing precautions and options. I hope these suggestions followed keeps me away from hell.

Hey JLC. I totally get the idea of buy and hold and I myself do it.
I just think investors who have a lot of money in the market should at least hedge part of their portfolios the cheapest way possible when the market shows signs of weakness. The cheapest way would be to hedge with put options. Don’t you think it makes sense instead of just sit in your hands seeing your net worth decrease in the bear market times?

Many years ago My Flagship Vanguard advisor showed me this nifty (proprietary) bar graph that had calculated risk AND YIELD with all the different stock/bond ratios. What amazed was the slight differences in yield while the risk was significantly lessened. As a Boggle head for decades and now 67 years old with about 30 years to live the sweet spot ratio for me is 45/55 and has been for a decade. I slept nicely thru 1987 and 2008.

In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497. – Warren Buffett